ITAT Ahmedabad Orders Recomputation Of Tax Addition On Steel Firm, Notes Lack Of VAT Cancellation Verification

The Ahmedabad bench of the Income Tax Appellate Tribunal (ITAT) has directed the recomputation of additions made by tax authorities against a steel manufacturer after finding that the Assessing Officer treated certain sales as non-genuine primarily on the basis of cancellation of a buyer's VAT registration without verifying when that cancellation took place.

“There is no verification by the Assessing Officer about the date of cancellation of the VAT registration by VAT department,” the tribunal recorded, noting that the addition was made based on information received from the investigation wing without proper verification.

The case arose from appeals filed by Shri Bhumika Strips Private Limited for assessment years 2014-15, 2015-16 and 2016-17.

The bench of Vice President Dr. B.R.R. Kumar and Judicial Member T.R. Senthil Kumar noted that the company is engaged in manufacturing stainless steel products and had shown total sales of about 2.12 crore in one of the years under consideration.

The assessing officer had doubted transactions with five parties and treated about 1.60 crore as unexplained cash credits out of total sales of about 2.12 crore, based on information that these entities were providing accommodation entries. One of the reasons cited was that the VAT registration of Kabra and Company had been cancelled.

During the proceedings, the company placed tax invoices and supporting documents to show that the sales were reflected in its books. It also clarified that Kabra and Company continued to carry on business under the GST regime and had filed returns as recently as April 2025. The tribunal noted that the Assessing Officer had accepted part of the sales and had not rejected the books of account.

On these facts, the bench found that the addition had been made “without making proper verification” and could not be sustained to the extent of the entire sales value. It relied on settled law laid down by the Gujarat High Court that where sales are recorded and not rejected, only the profit element embedded in such transactions can be brought to tax.

The tribunal also examined the company's margins. Net profit ranged between 0.6 percent and 1.26 percent across the three years, while gross profit was around 9 percent. In these circumstances, it held that only the profit element embedded in such sales could be taxed.

A gross profit rate of 9 percent was considered reasonable. The tribunal directed the jurisdictional Assessing Officer to recompute the income on that basis for all three years after giving the company an opportunity of hearing.

The appeals were allowed for statistical purposes.